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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Prashant Jain: Equities are the real gold over long term

Posted by Muthu on March 5, 2015

Einstein said, “Compound interest is the eighth wonder of the world. He, who understands it, earns it … he who doesn’t… pays it”.

This has been experienced in India.

Sensex was incorporated in 1979-80, 36 years ago.

At 17.1% CAGR, Rs 10,000 invested in Sensex has become 290 times (Rs.29.4 lakhs) in 36 years, while in gold at 10.4% CAGR; it has become 35 times (Rs.3.5 lakhs).

Over 36 years, Sensex has multiplied 290 times where as gold multiplied by 35 times.

A difference of 7% in returns over longer term has resulted in 8x increase in wealth (Equities have multiplied 8 times more than gold).

The average inflation over this period has been 8% (CPI). Thus, gold has given returns that are close to inflation, thereby merely preserving the purchasing power and wealth. On the other hand, Sensex has delivered nearly 9% excess returns over inflation, thereby enhancing the purchase power and creating wealth. Over long periods, this has made a big difference.

The reason for this is simple. Equities over time grow in line with the growth of underlying businesses. As businesses comprise the economy, the nominal growth of the economy (real growth plus inflation) is a good proxy for the average growth in businesses.

The Indian economy has grown at a remarkably constant nominal growth of 15% per annum. No wonder that the sensex CAGR of 17.1% is close to 15% nominal GDP growth.

In India, it is interesting to note that in the last 22 years or so that FII have been allowed to invest in stocks in India, the FII ownership has gone up from nil to 24% — roughly 1% per year. The sellers obviously have been domestic investors.

The dollars received by the locals from sale of their shares have been thus invested in gold. Gold, as pointed out earlier, has yielded near inflation (10%) CAGR vs 17% CAGR for the sensex. In effect, domestic investors have been exchanging a 17% CAGR asset for a 10% CAGR one. This certainly is not a smart thing to do.

Outlook for Indian economy and Indian equities is promising. India is one of the best placed among largeeconomies in the world in terms of demographics, demand and growth. India is a key beneficiary of lower oil prices. The savings from lower oil prices are near 2% of GDP on run rate basis at current prices over CY13 average.

Apart from lower oil prices, a strong, growth-oriented government bodes well for economic growth and for businesses. Key decisions of new government so far give confidence that lower fiscal deficit is a priority and it should continue to fall. Equities are the real gold. Equities compound near nominal GDP growth rates whereas gold compounds near inflation.

(Edited & modified version of article by Prashant Jain:


One Response to “Prashant Jain: Equities are the real gold over long term”

  1. subra manian said

    Golden words to be followed.I remember your golden words “stay the course”.G.SubramanianSent from My iPad

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